Very true — “The globalization of the credit crunch” has produced a series of currency crises in the emerging world
Alan Ruskin argues that the moves in the foreign exchange market today — with the dollar and yen rising sharply against nearly everything — reflect an unwinding of bets made on the assumption that the world economy would remain strong and market volatility would remain low even as the US slowed.
The dollar’s rise since July is part of a reversal in longstanding investment trends that prevailed during years of plentiful borrowing, strong growth and low financial-market volatility. “Essentially, every large trade that built up a head of steam in the go-go years has blown up or is in the process of blowing up,” wrote Alan Ruskin, chief international strategist at RBS Greenwich Capital, in a report to clients. “That goes for almost every asset class.”
That seems more or less right to me.
Crises have a way of clarifying what happened in the past. I think it is now clear that the scale of emerging market reserve growth from the end of 2006 to q2 2008 should have been a leading indicator that a lot of investors — probably too many — were betting that emerging markets (and indeed the world) could continue to grow rapidly even as the US slowed. Reserve growth was running well in excess of the emerging world’s current account surplus, as private capital was flowing into the emerging world in a big way. The IMF data indicates that private flows to the emerging world in 07 and the first part of 08 ($600b a year in 2007 — over twice the average pace of 04-06; see table A13 of the IMF’s WEO) were well above the levels seen before the 97-98 crisis.
Those capital flows — plus very low real interest rates, as many emerging markets followed the US rates down even though they were still booming — helped fuel surprisingly strong global growth even as the US slowed. The US actually wasn’t driving global demand growth over the last two years. Europe and a few booming emerging economies were. The world did decouple. Energy prices certainly decoupled from the trajectory of US demand. But only for a while.
In retrospect, large inflows to the emerging world - and expectations that emerging currencies were generally on an appreciating trend, making it safe to borrow in foreign currencies (or sell insurance against a large depreciation of an emerging market currency) led investors to take on a lot of risk. Consider for example the rise in borrowing from global banks by many emerging markets (documented by my colleagues at the Council’s Center for Geoeconomic Studies) over the past few years. The fuel for the current market fire was there.
I still never would have experienced that the emerging world could experience a sudden stop like it is experiencing now while it was still running a large aggregate current account surplus. Particularly after most emerging markets had built up rather substantial reserves. Both should have helped to buffer against a huge swing in market sentiment, at least in aggregate.
I haven’t done a detailed analysis, but my sense is that the scale and pace of recent market moves — and in all probability the scale and pace of associated capital flows — is comparable to the Asian crisis of 97-98.
Faster perhaps.
That is scary.
The leaders of the G-20 countries will have plenty to talk about when they meet in the middle of November.
UPDATE: I added Jim Reid’s line about the “globalization of the credit crunch” to the post’s title after posting it. I like the phrase. Reid is a credit strategist at Deutsche Bank.
Actually Brad, coulod part of the problem be that few seem to have seen that chains (ironically) now run through global financing systems; in manufacturing, they like to call it a value chain but in finance, perhaps it should be called the credit/financing chain. Yanking on and possibly breaking the links in the chain could cause (no pun intended) a chain effect.Leverage is part of the chain and the belated realization that leverage itself carries risk has led to today’s world as we see it.
Tokyo’s still doing ok, though exporters would probably beg to differ, at least there are still profits. The koreans are probably the ones on the hot tin roof; earlier in the year, bloomberg has several reports that korean businesses were financing in $ and yen when the won was at a high, there isn’t much left to the imagination now that the won has pretty much done the banana slip .
What do you think about the indian front though? Cracks appearing? Or could India be the china of this crisis?
I don’t have a well formed view of india right now. Lower oil should be good for india — and more than most emerging economies it seemed to have a domestic growth dynamic going. But indian equities have been caught up in a global deleveraging, there were jitters around one indian bank recently if memory serves and it is hard to argue with the market, which is pushing the rupee down.
Franky, i am all ears — I cannot keep track of all that is going on right now.
Brad,
How could ever decouple 2 countries that are each other’s biggest trade partner, with a currency peg, one having trade surplus, the other trade deficit?
It is more or less like saying that an addict decoupled from his supplier of drugs because he buys stuff from others as well.
Brad
I won’t join you when you write that the US was not the driver of global demand growth, but Europe and some emerging countries were. The US trade balance and its consumption driven economy was proof enough.
After the liquidity crisis where disposable money got froozen, we now have another kind of crisis that is a combination of money, scared of the follies of the wind and the waves, returning home and carry- and hedging unwinding. But one again it is a financial crisis where the indebted suffer.
The crisis in the real economy is unwinding more slowly and is something that will not be countered in the short run by pumping money in the system (by the CB’s, governments and IMF).
So no decoupling imo
There were a lot of loans being written in US dollars by overseas companies (and governments). Could that be contributing to the demand for dollars?
Also, regarding the reserves (especially China’s and Japan’s treasuries), might they not be as saleable as they thought they’d be? If they start to sell (even if they stop buuying), the value starts to decline and possibly precipitously in the current environment. Therefore, maybe their reserves are really reserves, at all, but a more or less “permanent” contribution to US coffers. They have their own version of MBS’s, in that they don’t want to start selling and, thereby, place a market value on them. Now, I know this might seem strange in an environment where treasuries are the “go to” asset class, but what if a big holder started to sell? How long would the prices hold up? Can anyone really see a scenario whereby China or Japan (or the Middle East) could really liquidate and use those reserves?
Correction: “…maybe their reserves aren’t really reserves, at all…”
India?
The short-short(completly disregarding the inhabitants religious structure, the northern neighbour and other to-the-north facts, arising from GREAT Britan`s delimitations, nukes and all the rest) version:
it`s a country sitting on top of accumulated, none-resolved, “structural problems”, meaning India is a social H-bomb, waiting to go off.
Countdown started.
So someone, please remove THE MORONS from the wheel.
And Brad, thnk you for trully excellent work.
p.s.
A wheel…
… is a circular device that is capable of rotating on its axis, facilitating movement or transportation whilst supporting a load (mass), or performing labour in machines. A wheel, together with an axle overcomes friction by facilitating motion by rolling. In order for wheels to rotate, a moment needs to be applied to the wheel about its axis, either by way of gravity, or by application of another external force.
Brad + Judy;
I just returned from India and I have to say, it’s a mixed picture. We see pro cyclical extremes like a housing bubble in the boom areas. A lot of people dream of rising in social status and invest in better housing, better cars etc. And we see big conglomerates that probably grew to fast and will pay a price.
But in fact the Indian middle class is considerably small. Compared to other countries there are fewer winners of the boom years but a legion of followers who dream to be the next ones to rise. The social structures push many graduates into tech jobs, if they enjoy it or not. So we see literally millions of well educated engineers, but moral and loyalty are reported to be low.
What is worrisome is the rise of social and ethnical tension. India was not very successful in fighting poverty. Many groups feel left out and even if Hinduism is teaching patience, you can see many signs that pressure is building up. If people feel pushed around, they will push back. The high inflation rate doesn’t help, either. It is an extra burden for the small income group.
One the macro view the biggest obstacles are the budget deficit and the lack of infrastructure investments. India seems to generate too little tax revenue from economic growth.
If I had to make a bet: There were fewer excesses in India than in other countries. India will feel the slump, too, but the fall will hurt less than in its peer group. But only if they will prevent social and religious unrest, which haunts the country every 15 years or so.
bsetser: I still never would have experienced that the emerging world could experience a sudden stop like it is experiencing now while it was still running a large aggregate current account surplus. Particularly after most emerging markets had built up rather substantial reserves. Both should have helped to buffer against a huge swing in market sentiment, at least in aggregate.
I did. Markets are extremely fickle, and things can move very, very quickly from “we’re going make lots of money doing X” to “oh my god, we are all doomed.” It’s all human psychology, and psychology can change in an instant. What is happening now has happened almost like clockwork every six or seven years for the past 200 years. Every few years, there is a financial crisis, and expecting a financial crisis in which everyone starts pulling money from emerging markets is like expecting it to snow in December. The one good thing about this crisis is that most emerging markets were expecting there to be massive pull outs of funds and so we don’t see the collapse that we did in 1998.
This is one of the reasons I didn’t think think and don’t think that it was a bad thing that China maintained huge reserves and had policies that encouraged savings and put those savings into US treasuries and agencies. With a huge pot of money, China is now in a good position to clean things up once some of the domestic companies go bad, and also to use fiscal simulus to boost consumption. This will prevent a total meltdown while the rest of the world is in recession and get China through that period until the next bubble and crash (and there will be another bubble and crash).
One often repeated and often forgotten lesson is that it is a *bad* idea for a developing nation to rely on money from foreign capital markets to fund domestic growth since all that money will get pulled out at the worst possible time. The things that you need to fund domestic growth are 1) domestic sources of capital or 2) foreign capital which is locked in and cannot leave if there is a crisis.
The other often repeated and often forgotten lesson is that loans from the developed world to the developing world usually don’t help in actual development, and the reason people promote them is that people make lots of money packaging those loans. People that package loans and capital for the third world are interested in their personal well-being and not the well-being of the nation receiving the loan.
It’s not that China is run by particularly brilliant people that are incapable of doing stupid things. It’s that with one hundred and fifty years of trying and failing to develop, China has done most of the stupid things involved in economic development, and after one hundred and fifty years you end up with a lot of knowledge about what not to do.
»Faster perhaps. That is scary.«
Please notice how Pakistan (with it’s, courtesy of the crown, share of the east-Iranian ethno-linguistic Afghan tribes, better known as Pashtuns, not to name them other-names, who btw. to my guessing-capabilities are not planning to invade the Hormuz St. currently) suddenly jumped the »who’s Vulnerable« waiting-list, in front of Latvia Lithuania, UAE, Romania, Poland, Kazakhstan, Russia (*), Brazil (;), India (?) and China (!), followed by the Belarus (that wasn’t listed anywhere), to get in line for the »sorry we have a sex scandal right now«, while Argentine lawmakers (they also weren’t listed anywhere) try to block nationalized pensions (ups, don’t say that word) assets use for debt repayment and some ancient characters warned “the transatlantic union” about Bosnia falling apart.
And please notice furthermore that the U.S. got not to get listed in the waiting-for-trouble lists anywhere. Yes, regardless of fairies furiously clicking-in The money thus The debt and thus The wealth (of “nations”). That’s what “accelerating dynamics of reality” was referring to.
Now, is This a “rocket-science”?
TheWord,
i totally agree with you. it is just enough to surface the news that china/japan are shedding their ‘treasuries’ and those will plummet in value. for that reason this is frozen money. its purpose was to create temporarily employment at nominal wages in china and real at japan and to subsidize the consumption of the produced goods in the usa.
any repay would require reversal of the current balance of trade, which of course will mean serious economic pain for all non commodity net exporters.
there is no painless way out for the parties involved if they want to fix their present trade problem.
[...] an
Twofish:
“This is one of the reasons I didn’t think and don’t think that it was a bad thing that China maintained huge reserves and had policies that encouraged savings and put those savings into US treasuries and agencies.”
Kudos for China for trying to stabilize its economic development. But by trying to prevent old failures they invented a couple of new ones. Reserves are a good thing, big, big, big reserves are an imbalance that will trigger a counter reaction of the market. China tried to keep the money out of the country but many will be surprised how unsuccessful that strategy was. It simply gave rise to a shadowbanking system that might prove to be as damaging as uncontrolled inflation of the official money system.
What surprises me is the losses that the policymakers would accept by buying T-bills instead of making productive use of the money.
Brad,
Could you explain the mechanics of China selling its treasury holdings and then using funds to spend domestically? Is it as complex as the sterilisation operations or relatively easy?
What’s going on in a simple explanation is the US economy is the heart of the world and the US dollar is the worlds blood and we just had a heart attack. The fed and treasury have been defibrillating over and over.
Right now, we’re waiting to see if the heart stabilizes. In the mean time, the rest of the body is in shock over an unexpected disruption in blood flow.
In another language;
there is a »staff report 415« out, over in Minneapolis:
The researchers (Bets, Kehoe) found that »quarterly bilateral real exchange rate and the relative price of non-traded to traded goods for 1225 country pairs over 1980–2005 are positively correlated, but that movements in the relative price measure are smaller than those in the real exchange rate.” “only 7 percent of the variance of bilateral US/EU real exchange rates is accounted for by the relative price of non-traded goods. …29 percent of the variance of US/non-EU real exchange rates.. “and 39 percent of the variance of the United States’ real exchange rates with its two North American Free Trade Area (NAFTA) partners, Canada and Mexico.«
Furthermore on “others”:»for US/EU trade partners, which trade relatively little compared to the size of the economies involved, the relation between the real exchange rate and the relative price of goods is dramatically weaker than it is for any other classification of trade partners or trade blocs«
There is also
1. one anomaly
“the relation between the real exchange rate and relative price of non-traded goods for US/EU bilateral trade partners is unusually weak.”
2. and one oddity
»there does seem to be some evidence that the inclusion of high income trade partners may somewhat raise the measured size of this relation, at least when the data are measured in levels and four-year differences. This second anomaly of the Chinese data warrants further investigation.«
So that’s what’s based on then (1980-2005).
Now (2008) try exploding the world’s real exchange rates “pairs” and see what happens, given the above results and the assumptions that they lay upon.
Curious — China wouldn’t need to sell a single treasury to increase its fiscal deficit. It would just increase domestic spending and borrowing, putting more of China’s own savings at work at home. that would tend to increase imports — and slow the pace of accumulation of China’s foreign reserves.
in an extreme case, the fiscal deficit might get so big that China would start to run a trade deficit, which could be financed by selling reserves. but the far more likely scenario is a smaller surplus.
fx reserves cannot directly finance a fiscal deficit — only the trade deficit that results from a fiscal deficit (or capital outflows).
2fish — i have more sympathy for china’s capital controls/ limits on external borrowing than its reserves stockpile. the huge buildup of reserves in my view contributed to the distortions in the global economy (notably the large us household defict/ over investment in residential real estate) that contributed to the crisis — and so long as China had its controls in place, it didn’t need $2 trillion plus (and growing) reserves to limit its exposure to a global crisis.
I also still see signs that China is focused on trying to support exports even as global demand disappears — note the export rebates. so I am not sure the reserve growth of the past few years was a bridge to a new policy of stimulating domestic demand rather than a fundamentally merchantilist policy of trying to run large trade surpluses though an undervalued exchange.
that said, i do think that we need to think of ways of increasing the global stock of reserves that do not involve more huge EM surpluses –
Ou, there goes (the) Russia(`s long-term sovereign credit rating).
gv — i stand by my statement that over the last TWO years, the US hasn’t been the driver of global demand growth. The US slowed initially more than the world, so from mid to late 06 on (when housing/ residential investment first turned down and there was lot of talk about how it was all contained) US growth was slower than growth in the rest of the world. invesmtent is part of demand and residential investment was falling.
as a result, the US non oil deficit peaked a couple of years ago and started to head down. conversely, the IMF’s data shows an increase in Europe’s aggregate deficit (EU = europe, not eurzone). and clearly the oil exporters started to spend more of their oil windfall, generating a new source of demand for the goods of the oil exporters.
put simply, the US had a large trade deficit — but the trade deficit (non-oil deficit) was falling, so at the margin the US wasn’t driving global demand GROWTH.
right now we are shifting into a much scarier world, one which looks to be producing a very sharp GLOBAL deceleration of economic activity as the global fall out of the crisis increases.
There seems to be a dual purpose and partition in the reserve positions of EM countries with pegged exchange rates and CA surpluses.
The first is an “offensive” component that is the deliberate result of pegging exchange rates in order to encourage net exports.
The second is a “defensive” component resulting from the interaction of the same exchange rate policy with undesirable capital inflows.
The first creates inefficient global imbalances.
But the second would seem to have a useful precautionary purpose in positioning for the potential reversal of those capital flows - which seems to be happening now.
Gregor Neumann: But by trying to prevent old failures they invented a couple of new ones.
Sure. That’s the nature of economic decision making. The important thing is not to prevent failure which is impossible but rather to make sure that when things fail they do so in an orderly way.
Gregor Neumann: It simply gave rise to a shadowbanking system that might prove to be as damaging as uncontrolled inflation of the official money system.
That all depends on the details of how the shadow banking system runs. I’m sure that you will seen all sorts of quasi-banks start to go bust, and all sorts of people mobbing local governments wanting to get their money back, but…..
The question is what the linkage between the shadow banks and the general financial system. What got the US in trouble was that people were borrowing cheap money from the banks and then putting it into shadow banks. So when the shadow banks go bust, it hits the regular banks hard.
What I think is happening in China is that the shadow banks are being funded either by borrowers that are totally outside the regular banking system or else funded by invested capital, so when the shadow banks go bust, the losses come invested capital rather than being transfered to the regular banking system.
Gregor Neumann: What surprises me is the losses that the policymakers would accept by buying T-bills instead of making productive use of the money.
The trouble is that if you try to spend the money, then you just pump things into a broken system, which makes it harder to fix it.
bsetser: so long as China had its controls in place, it didn’t need $2 trillion plus (and growing) reserves to limit its exposure to a global crisis.
But as Gregor Neumann points out, capital controls are rather ineffective. In any sort of banking crisis where you have a sudden loss of confidence in the RMB, I’d argue that capital controls would likely be totally useless.
bsetser: I also still see signs that China is focused on trying to support exports even as global demand disappears — note the export rebates
Looking at the Xinhua and the People’s Daily, all the talk at the Central Committee has been in massive investment in rural areas. No one is talking about boosting exports. Besides, it’s not going to work. If people in the US stop buying Chinese goods then no amount of export rebate is going to change that.
bsetser: I am not sure the reserve growth of the past few years was a bridge to a new policy of stimulating domestic demand rather than a fundamentally merchantilist policy of trying to run large trade surpluses though an undervalued exchange.
The major source of the policy of reserve growth was people looking at what happened to nations without reserves in 1998 and being frightened of the consequences. What happened in 1998 is happening again, only this time the consequences are less severe because lots of nations do have large reserves, and it will probably happen again around 2018 when the alternative energy bubble bursts and people start running for the exits.
bsetser: that said, i do think that we need to think of ways of increasing the global stock of reserves that do not involve more huge EM surpluses
Why?
JKH: The first is an “offensive” component that is the deliberate result of pegging exchange rates in order to encourage net exports.
That certainly wasn’t the original intention of the Chinese government. The RMB was pegged in 1993, and went through periods (notably the Asian crisis) in which the currency was overvalued. In 1993, there is no way that Beijing could have forseen the policies of the Bush administration.
BWII fell apart not this year but in 2003-2005 when the Bush administration insisted on fighting a war and cutting taxes. BWII fell apart much like BW I did.
Now, once the dollar started to fall around 2002, then you could argue that keeping net exports was a reason why the Chinese government was slow at unpegging. However, unpegging a pegged currency is one of the most dangerous things that a country can do, so some slowness was expected.
I have seen a few negative comments in this section about the Indian economy. I am afraid that a majority of the overseas investors have similar opinions about India. Could this be the reason for FIIs agressively shedding their portfolio in India?
This does make me fear that even Jim Rogers has the same opinion when it comes to India. He always mentions he is buying China, Taiwan, agriculture, some gold etc. But fails to mention INDIA.
Brad
Thanks for taking the time to comment on my point of view. I will have closer look at the composition of EU demand (rising import/slowing export?) and at the interaction with the rest of the eurozone.
Furthermore I need to weigh the relative importance of the different growth numbers.
robert mundell was talking about crisis with volcker and stiglitz. and he maid some observations that i find interesting and at the same time confusing. he’s arguing that whole financial mess in last couple of months was caused( or exaberated by stronger dollar. i dont see the logic here. he said that stronger currency is causing more NPLs. how? if currency is devaluating and lot of liabilities are in foreign currency that can cause more NPLs like in asia 1997, or argentina etc.. but other way around? it’s hurting exports, that’s clear, but financials?
Twofish:
“What I think is happening in China is that the shadow banks are being funded either by borrowers that are totally outside the regular banking system or else funded by invested capital, so when the shadow banks go bust, the losses come invested capital rather than being transfered to the regular banking system.”
Interesting. I have to admit that my information about the shadowbanking system in China is secondhand knowledge. But it would surprise me, if there is no connection between informal and formal banking.
Shadowbanking works differently in the US in China. In the US we are talking about highly leveraged hedge funds that operate with borrowed money — either private equity or bank credit.
In China it is private equity, money from creative accounting (tax evasion, diverted funds or illegal means) or foreign investment (hot money). This doesn’t make it more stable funding. Whenever to creditor feels, he needs his money back, the debtor is in deep trouble. I’d be surprised, if the informal banks would just disappear and leave the money as a gift with the unhappy company that had to get funding outside the official system.
Thor:
“he’s arguing that whole financial mess in last couple of months was caused( or exaberated by stronger dollar.”
There have been a lot of bets against the Dollar. The big unwind is strengthening the Dollar, which leads to big trouble for everybody who borrowed money to pay it back with cheaper USD later on. Currency hedges gone bad are big news in China and Brasil.
How do we know that there’s been a “huge swing in market sentiment” against emerging markets?
I mean I borrow yen and invest in emerging markets. I notice that for whatever reason the yen is trending higher and then, see it explode upward in October.
Why wouldn’t I sell emerging markets and repay my yen denominated debt and live to see a better day. And if I’m in the emerging market although not involved in the yen-carry trade and I’m watching the emerging market falling, well, I’m going to sell, too.
I don’t understand why I’d care that the emerging market I’m invested in is “running a large aggregate current account surplus” or has “built up rather substantial reserves.”
Anybody?
Brad,
There is a rumor circulating that China is interested in purchasing all the gold the IMF is looking to sell? Any merit to that>?
Also why wouldn’t china try and piggy back the irrational demand for treasuries and sell into it like a secondary offering with insider sales? Realize they would need to do this stealthily? They are already on record calling for a conference of the largest debt holders to make sure they don’t create a panic?
I don’t think this is the trap that so many here in the US see? It appears the US treas is using the dollar strength (relative) to sell in massive treasuries? The question is why is Paulson going so short on the curve? This seems like a really dangerous strategy? This is not the time to skimp on cost, but the US isn’t really in a position to chose. The incremental cost of $30 billion is a drop in the bucket considering what is handing out to banks? It makes little sense. Why not term out the debt?
Says to me they think rates go much lower - we know at least on the short end. begs question of when the market imposes some discipline? The whole idea of an operation twist and or bernanke saying he would buy debt is another question. we already have quant easing so i suppose this treas buys is a given at this point. But a mere sniff of FCB selling would steamroll Benji. Perhaps that is what the G20 is all about. Must be.
Have you given any thought to what the terms of a debt workout in the US would look like with China and other big holders? The template seems to be equity/warrants? What kind of unconventional means could the US give in a debt restructuring of itself? Intellectual capital? Technology? Military? Taiwan (China)? Ukraine (Russia)? GM (Japan)? This would be somewhat of a retreat akin to the British a la Suez and the collapsing of the empire.
Finally, the USD seems like it is nearing its end – but who knows, inefficiency can last a lot longer. That said, any thoughts on what you see as a palatable alternative to the dollar. The US will oppose anything related to such a move off the dollar but there will come a time when it has no choice? In such a scenario why wouldn’t the US just devalue (Bernanke has it as part of his checklist) if they knew the dollar window was closing. It is the rational thing to do?
‘Why wouldn’t I sell emerging markets and repay my yen denominated debt and live to see a better day. And if I’m in the emerging market although not involved in the yen-carry trade and I’m watching the emerging market falling, well, I’m going to sell, too”
if youa r ein Em and you aren;t carry and you are there for value not free ride off carry then you should be doubling down huge. The fact that you are not seeing that tells you that your investment thesis was wrong to begin with. When they stop going down then you will know the approp adjustemnt has taken place. The BS from the Gov’t that somehow this is irrational selling is food for the masses. Assets are simply being repriced for what they are. Everything else is self indulgence or delusion.
Gregor: But it would surprise me, if there is no connection between informal and formal banking.
There are linkages, but it’s the type of those linkages that determine if you have a problem that you can spend a few months or years to fix, or something that you have to fix right now.
Gregor: Whenever to creditor feels, he needs his money back, the debtor is in deep trouble. I’d be surprised, if the informal banks would just disappear and leave the money as a gift with the unhappy company that had to get funding outside the official system.
Creditor comes in and demands payment. Debtor pays the money. He either shrinks the company, or in the worst case scenario shuts it’s doors. If the company has borrowed lots of money from a bank then the bank may be in trouble, if not then the dominoes start falling there.
So what you have is a set of falling dominoes in which one domino causes the next to fall. The important thing is how fast and how violently the dominoes fall, and there is enough capital reserve in the system I think to keep the dominoes from falling so quickly that you have the sort of crisis you had with the US banks.
Ellen1910: I don’t understand why I’d care that the emerging market I’m invested in is “running a large aggregate current account surplus” or has “built up rather substantial reserves.”
You wouldn’t but if lots of people start showing up and dumping EM currency and the reserves start getting depleted, more people will start dumping EM currency and you end up with a classic bank run. It happened in 1998, and even though it is early in the game, we still haven’t had the sort of crises we saw then.
Why — because I would prefer to help emerging markets meet JKH’s need 2 (precautionary holdings v big swings in capital flows; swings that now seem even larger than most anticipated) without encouraging mercantilist policies of holding exchange rates down to encourage exports. Currency swaps among central banks for example would allow everyone to hold more reserves w/o requiring trade surpluses to build up reserves. I am very worried that Korea will defend a weak won as it builds up reserves — and that this will be a major constraint on China’s willingness to allow further RMB appreciation (at least v the USD).
2fish — the fiscal measures announced in china strike me as small; i want to see more …
and i am fairly confident that the pressures that led China to end RMB appreciation v the USD (pressure that was in place well before the USD’s recent rally) remain.
Brad,
You will stop being caught by surprise if you take the time to read Richard Duncan’s 2003 book. He predicted all of this. We have a very brief summary of what he wrote in our commentary this week:
“Richard Duncan also raised the alarm in his 2003 book, The Dollar Crisis: Causes, Consequences and Cures. Duncan predicted that global supply would soon outrun global demand as the countries pursuing export-oriented growth would produce more and more goods without a corresponding increase in income among worldwide consumers. Duncan was echoing the economist John Maynard Keynes, who argued that depressions occur when savings outrun investment, causing a deficit in the demand for products.”
Let me briefly summarize the relevant economic history and economic future:
1995-2006. More and more countries adopt mercantilism as a growth strategy, loaning money to, instead of buying goods and services, from the net importing countries (chiefly the U.S.). Without income from exports, the net-importing countries go ever deeper into debt.
2006-2007. Like other debtors, the net importing countries can’t continue to pile on debt and are forced to pull back.
2008. The governments in the net importing countries realize that their people are borrowed-out, so they try to pick up the slack caused by the fact that their consumers cannot borrow. The governments borrow money from the net exporting countries in a vain attempt to stimulate enough worldwide demand to prevent the recession from turning into a depression.
2009- ?. The world goes into a worldwide depression due to the fact that the world’s savings exceed the world’s exports. The usual course of a depression is followed. First inventories build up. Then investment falls precipitously. Then factories are closed and unemployment mounts. This depression will continue until the mercantilist countries give up on mercantilism.
The United States could immediately get out of the worldwide depression, even before the mercantilist countries act, by forcing trade into balance through what Warren Buffett called “Import Certificates”. For an explanation of this plan, see our commentary published this week ( http://www.enterstageright.com/archive/articles/1008/1008buffet.htm ).
Howard Richman
tradeandtaxes.blogspot.com
Whoops, in my second to last paragraph I meant to write, “The world goes into a worldwide depression due to the fact that the world’s savings exceed the world’s investment“.
bsetser: Why — because I would prefer to help emerging markets meet JKH’s need 2 (precautionary holdings v big swings in capital flows; swings that now seem even larger than most anticipated) without encouraging mercantilist policies of holding exchange rates down to encourage exports.
The trouble is that emerging markets give the developed world and international institutions a lot more trust than is warranted. This may have worked if the IMF worked the way that it was originally envisoned in Bretton Woods I, but it hasn’t.
Basically, a developing nation is run by total fools if they think that they can deal with a currency run by going to the IMF and the developed world. The experience of nations that have tried that approach is that it is usually too little, too late, and comes with large amounts of strings and conditions in which the nation begging for aid has to give up large parts of its sovereignty and control.
If China were to ask for the IMF for aid, you’d have protesters coming everywhere seeing this as a perfect chance to force their agendas on the Chinese government.
People ask what China gets by having such large currency reserves and the answer is like all savings, money buys you power and freedom. If you have money in the bank, you can tell your boss or the IMF to take a hike.
bsetser: the fiscal measures announced in china strike me as small; i want to see more …
I don’t think it’s a good idea for Beijing to start dropping too much money. If it turns out that the recession is less intense than people fear, then we could have the economy overheat.
The thing about the Chinese government is that it has a “pro-growth” bias which means that once you start not discouraging fiscal spending, every local official has their pet project and development scheme. Getting a Chinese government official to spend more money is rather easy to do. It’s getting them to stop spending once it’s obvious that things are overheating that is hard.
Quote of the Day from JP Morgan economist Frank Gong. Basically, he states that it is good to have money in the bank when times are tough:
http://afp.google.com/article/ALeqM5jZ8-lj8LfzPBGQNRGyOIxFIT3VyQ
With high liquidity, 1.9 trillion-dollar foreign exchange reserves and a stable currency, China “has the most flexibility in the world to fend off the impact of the global financial crisis”.
Ohohohohoooo… “Bubbles” Greenspan admits he might just be a teensy-tiny itsy-bitsy partly somewhat maybe personally responsible for the current global financial armaggedon?
I’m shocked, I tell you! Simply shocked!
You know, Alan Greenspan can never be a bartender. If Greenspan were a bartender, everyone would be knocked-out on the floor, he doesn’t know when to stop serving drinks!!!
Islamic Middle East Banks insulated from US Subprime crisis
http://www.globalresearch.ca/index.php?context=va&aid=10651
Ironically, least affected by the crisis are Islamic banks.
They have largely been immune to the collapse because Ilamic banking prohibits the acquisition of wealth via gambling (or alcohol, tobacco, pornography, or stocks in armaments companies), and forbids the buying and selling of a debt as well as usury. Additionally, Shari’ah banking laws forbid investing in any company with debts that exceed thirty percent.
“Islamic banking institutions have not failed per se as they deal in tangible assets and assume the risk” said Dr. Mohammed Ramady, Professor of Economics at King Fahd University of Petroleum & Minerals. “Although the Islamic banking sector is also part of the global economy, the impact of direct exposure to sub-prime asset investments has been low” he continued. “The liquidity slowdown has especially affected Dubai, with its heavy international borrowing. The most negative effect has been a loss of confidence in the regional stock markets.” Instead, said Dr. Ramady, oil surplus Arab nations are “reconsidering overseas investments in financial assets” and speeding up their own domestic projects.
“Islamic banking”, said Dr. Al-Sha’alan, “always protects the individuals’ wealth while putting a cap on selfishness and greed. It has the best of capitalism - filtering out its negatives - and the best of socialism - filtering out its negatives too.” Both systems inevitably had to fail. Additionally, Europe and Japan did not need to be held accountable and indebted to America anymore for protection against the Soviets.
Brad,
The US always had the ability to undertake a reserves swap with the rest of the world (admittedly not with China, due to its non-convertible currency), by using the reserves capital inflows to accumulate more foreign exchange reserves itself. But that was beneath the Americans, and anyway, would have required them to forego some consumption.
DJC: it is good to have money in the bank when times are tough
Not when the bank won’t let you have it all back because they say you forced it on them!
[...] an
“The US always had the ability to undertake a reserves swap with the rest of the world (admittedly not with China, due to its non-convertible currency), by using the reserves capital inflows to accumulate more foreign exchange reserves itself. But that was beneath the Americans, and anyway, would have required them to forego some consumption.”
Rebel,
I think you’ve made this point before but I’ve never been clear on it.
The US can’t use CA deficit funding (from foreign CB reserves or elsewhere) to finance reserves. It would require funding in excess of this.
Also, I don’t see the connection between US reserve accumulation and consumption.
Reserve accumulation is only a balance sheet transaction at the margin – not expenditure.
(Consider the analogy with TARP as an investment rather than expenditure.)
Since the US doesn’t run a current account surplus, the type of reserve accumulation you’re suggesting is simply shorting (borrowing) additional US dollars for a long position in foreign currency.
Am I missing something?
Brad,
I would argue that one key transmission link of the crisis is the need of money center bank to retrench, preserve cash and liquidate assets. Even if there is excess liquidity in some emerging markets, the only worldwide financial system was the U.S., European and, to a much more limited degree, Asian banking systems. When two of the three shut down, they infected every market where they were systemically important.
That would explain the conundrum of a current account surplus and growth potential in emerging markets but no actual irrigation of these economies with cash.
Dan
This looks like a great time to buy equities. Info on this blog indicates there’s very little likelihood of a bear run on the U.S. Dollar in the near future.
Brad:
I am not sure the reserve growth of the past few years was a bridge to a new policy of stimulating domestic demand rather than a fundamentally merchantilist policy of trying to run large trade surpluses though an undervalued exchange.
It’s easy for the Chinese Govt. to subsidize oil for their local economy and slowly exhaust their USD reserve against that. But they won’t do that because they are under the US foreign policy thumb.
Spending money on rural infrastructure will re distribute income between the relatively rich urban Chinese and the rural poor, and this won’t affect the USD reserves.
Dan — i agree with your point that a key transmission channel has been the need of money center banks to retrench and conserve cash. To that i would add a retrenchment by money market funds, and thus the loss of another source of funding for the dollar based financial system.
Is the credit crunch a myth?
We’ll know the facts behind this credit crisis with some simple basic math:
According to realtytrac, 766,000 homes received a foreclosure notice in Q3 2008, up 70% from last year. According to the Mortgage Bankers Association around half the people who receive foreclosure notices lose their homes, and the net loss is between $30,000 and $60,000 to the banker per foreclosure.
Taking the average loss to the bank per foreclosure to be around $45,000, the total loss to banks in the latest quarter is in the range of around $34.47 billion… call it 35b, in Brad’s style
According to OFHEO HPI and other housing price indices housing prices peaked in April 2007. Overall the loss so far from mortgage foreclosure is over 6 quarters, from Q2 2007 till Q3 2008. Even if there are some errors in the estimate above, by any stretch, the maximum loss from foreclosures to banks can’t POSSIBLY be more than around $200 b or so.
Treasury is already sitting on an approved bailout of $700b.
There are other ways to estimate the actual loss from home owner defaults, e.g. from census data on prices, OFHEO data on price decrease percentages, etc.
According to OFHEO HPI the median price decrease is 6.5 per cent from the April 2007 peak. The average price of a new US home in 2007 was $313,600 in 2007 and the median was $247,900. A decrease of even 7% in this amounts to $21,952.00. Approximating even higher and higher we get an average loss of $22,000 per home in terms of home value. This would reduce our estimate of the loss in the latest quarter to $ 16.85 b, and the total over the last 6 quarters to a maximum of $ 100 b!
Chidambaram: This looks like a great time to buy equities. Info on this blog indicates there’s very little likelihood of a bear run on the U.S. Dollar in the near future.
Unexpected things happen. “There is little chance of X” are famous last words in finance because people get into massive trouble when X happens.
Chidambaram: It’s easy for the Chinese Govt. to subsidize oil for their local economy and slowly exhaust their USD reserve against that. But they won’t do that because they are under the US foreign policy thumb.
That’s not the big reason. The big reason is that if you subsidize oil prices it kills the profits of the Chinese oil companies, which causes their stock prices to plummet which makes the bad situation in the Shanghai markets worse. That’s why the government relaxed price controls. Also the government policy toward oil prices has been one of price stabilization rather than control. Throughout the 1990’s, the state mandated price of oil was much higher than the market price which had interesting effects (such as rampant smuggling).
To Chidambaram: The problem is that if you graph all of the numbers (number of foreclosures, number of delinquencies, housing prices etc. etc.), they are all trending the wrong way, and they haven’t hit bottom, and we still haven’t really had major job losses. Also, if you look at previous real estate bubbles it usually takes about three to five years from prices to hit bottom. House prices are very misleading because people will hold on to a house at an inflated price rather than sell it.
The other problem is that no one knows right now who is going to get hit with the losses, so no one is lending money out of fear that the bank that they lent money to won’t be able to repay it.
It is true that the ultimate cost to the government is not likely to be anywhere close to $700 billion, but you still need $700 billion in cash since you will likely have to issue cash for some sort of loan with collateral.
I should point out that this is an example where some of the standard assumptions that you see in economics texts break down. In the abstract world of economics, $100,000 in cash is the same thing as $100,000 in T-bills is the same thing as $100,000 in gold is the same thing as a $100,000 house is the same thing as $100,000 in agency bonds.
However in the real world, when someone wants $100,000 in cash, they want often want $100,000 in cash. Not T-bills, not gold, not stock, not bonds, not houses. Cash.
The other thing to note is how tiny more emerging markets are compared to the big banks. Thailand’s GDP using official exchange rates is about $250 billion. Citigroup has $2 trillion assets under management and about $100 billion in shareholder equity. What this means is that the capital flows between the big banks are just going to swamp your average medium sized country.
Brad
caught roubini’s soundbite on closing the markets, wonder what you think of it (actually it was 3rd source info, having come from bloomberg via Yves Smith’s site).
this will probably annoy some people but noentheless, guessing that the indian rupee might face significant pressure and that asia might find itself not so buffered after all. funds ( those who are still existing) might well find bargains in the region though, but convincing investors to cough up the money in such times might well be tough.
am looking at June 09 as time when the crisis and the recession undeniably lands in asia; as in main street will see full blown effect; any other guesstimates?
Brad,
You said:
Currency swaps among central banks for example would allow everyone to hold more reserves w/o requiring trade surpluses to build up reserves. I am very worried that Korea will defend a weak won as it builds up reserves — and that this will be a major constraint on China’s willingness to allow further RMB appreciation (at least v the USD).
1) Shouldn’t Korea burn its reserves to defend weak Won? How does it do that while building reserves?
- Also, I don’t see how Korea will build its reserves. Korea is very export dependent and esp to shipbuilding, steel and auto sector. So, despite the weak Won, the global demand situation is unlikely to help its export for the coming 2-4years.
2) I always thought that it was the worry of its price competitiveness in export that is blocking China from further RMB appreciation. However, it seems that you have some other pressure in your mind. Can you please give me some more clarification?
Thank you.
Always appreciate your posts.
I apologize all writing turned italian… Apparently I do not really know how to use html tags…
Imf cannot rescue the currency crisis to the full extent because they dont enough resources to rescue
eastern Europe, central america, south asia and other host of individual countries because imf has only 200bn but the rescue requires atleast 300bn dollars for the rescue. Apart from that imf gets the money from US, EUROPE and JAPAN who themselves are in trouble. They would better use the resources for their use.
US economy cannot recover this crisis easily because US is a credit based economy. Since US is a speculative economy there are no real productive assets . Credit is given based on asset prices and their rise and not on wages people receive.Thus falling asset prices and stocks lead to lesser credit and lesser credit leads to lower assets prices which becomes a vicious circle. Economy will bottom out only when economy gets out of cluctches of credit .
Srinath- India is particularly vulnerable because india’s forex reserves basically consists of 100bn of NRI deposits , 75bn of external commercial borrowings and 50 bn of f ii which covers the bulk of forex reserves. ECB are to paid back over 5yers average and thus India is vulnerable to 200-250bn $
capital flight as rest of them are hot money inflows.
Pakistan will get imf financing this time but they will blow up within one year since Pakistan runs a current deficits of 15bn dollars each year and world cannot give free financing to Pakistan each time. They will go bankrupt next year and a next dictator will invade strait of Hormuz and will choke the world of oil and put world economy into a hyper inflationary depression.
jkh,
You are not missing anything; all the parts are there. As you say, the US cannot use CA deficit funding to finance reserves accumulation. I am turning this argument around to say that, if the US had acquired more reserves, it would have had less of a CA deficit. In other words, the US CA deficit is at least as much due to the US itself as China.
How would this have worked? The funding could have either come from higher taxation - ie a smaller government deficit - or extra government borrowing (hopefully offset by lower consumption via higher long term interest rates). Either of these would have lowered US consumption, including imports. None of the changes implied should have been unacceptable - it would be hard to argue that (1) US reserves were too high (2) the US government deficit was too low (3) US long term interest rates were too high (4) US consumption was too low.
Essentially, the option of funding reserves accumulation by selling extra debt boils down to a reserves swap. The extra demand for US debt from foreign reserves managers is accommodated, and the proceeds are used by the US to buy foreign currency debt. Just as if the US swapped saleable dollar assets for saleable foreign assets. Of course, at a more detailed level, since the renminbi is not convertible, the US would have had to buy euros, yen and pounds etc, but this would have spread the load of Chinese “mercantilism” to other countries.
By the way, most of these points apply to the UK too.
Just two cents from an amateur economist like I am : my impression is that we are in a typical phase 2 of a crisis that breaks up in the centre of the financial system (US)
The phase 1 is a slowing of the US, with the rest of the world still not affected: in that phase the dollar is devalued and there is a general impression of the so called “decoupling”. This mood is evident, for example, in “Not America’s decline - the rise of everyone else”
[http://www.financeasia.com/article.aspx?CIaNID=82632]
In phase 2 the rest of the world starts the slowdown and the financial stress in US increase: at this point the US financial institution bring back in the US the capital invested abroad to support the US markets. Basically as today all the decision made by US policymakers are try to save the banks and inject as many liquidity as possible in the financial system, seen as the core of the problem, while the “real” economy (business and family) is not considered critical yet.
The impression in phase 2 is the overdependence of the whole world to US.
Normally the phase 3 is the recovery of the US economy, the stabilization of the US dollar and of the rest of the world economy.
But this time I think that imbalances have grown so far that will be impossible to postpone any adjustment in US by adding more debt (public this time).
We will enter in phase 4: when Dow Jones will break 7200-7600 level and go down to 5000 or so any effort to save the US financial system will be useless and counterproductive, and the shift will be save the US real economy instead of US financial system. At that point dollar will be greatly devalued against all currencies, and particularly those who supports US system (China, Japan, etc.) to prop-up US exports, and BWII will finally collapse.
Until then the imbalances won’t be corrected much (trade deficit of US will go down overall in Q4 but not with China, instead this deficit will pass from currently 42% to 66+% of total, in my opinion)..
“Why not term out the debt? ”
I agree. The yield on 30-years is now close to 3.8%. If the US Gov had any sense, it would start selling these suckers big time. The rest of the world wants Treasuries? I say, give them Treasuries.
Rebel,
Thx.
Your implied objective seems to be to fund US reserve accumulation while maintaining the level of total USG debt financing. You would then aim to offset new debt financing required for reserve accumulation (investment) with a reduction in debt financing required due to a reduction in the budget deficit (net expenditures). Total debt financing (defined to include the currency swap alternative) would remain unchanged.
A reduction in the budget deficit would reduce the existing current account deficit, other things equal. A reserve increase would have no further effect on the budget deficit or the current account deficit, other things equal. An international dollar debt issue or a currency swap would increase gross but not net US international liabilities. A domestic debt issue followed by market intervention to build reserves similarly would affect the gross but not the net international balance sheet.
As I said, I find the interpretation of this to be quite analogous to the debt/deficit effect of the TARP, which has been totally confused in Treasury’s communication and the general understanding of the budgetary fiscal effect. Paulson said in a Charlie Rose interview a couple of days ago that his biggest mistake/shortcoming in communicating the program was this aspect.
East Asia to establish 80-bln-dlr fund to cope with the financial crisis
http://www.sinodaily.com/2006/081024095652.8d53hio1.html
China, Japan and 11 other Asian nations agreed Friday on an 80-billion-dollar war chest to save beleaguered currencies in the most ambitious regional plan yet to cope with the financial crisis.
“We plan with our East Asia dialogue partners to launch (the fund) as soon as possible,” said Sultan Hassanal Bolkiah of Brunei, one of the 13 nations planning to take part in the fund.
Earlier in the day, Chinese and Japanese leaders reached consensus on the plan with their counterparts from South Korea and the 10 members of the Association of Southeast Asian Nations (ASEAN).
To summarize this particular (detachment’s phase in progress) “fractal dimension”;
1. SDRs aren’t that special anymore;
2. Thank you doves for understanding and
3. Thanks, fairies, for the ride. For now.
Guess who’s going to be importing a lot? How’s that for “architecture”?
Twofish:
I agree with you that ‘there’s little chance of X’ is not a ‘good enough’ investment strategy.
The total ‘brick and mortar’ loss, coming from a bank’s loss due to a foreclosed home, can’t possibly be more than around $ 200 b so far. Treasury is already sitting on a $700 b bailout.
The reason financial institutions are suffering much bigger losses is because the notional principal on a credit default swap (CDS) is not tied to that on the underlying loan, or ‘referenced liability’.
The ‘credit crisis’ is a result of FIs not having adequate capital to meet their CDS settlement related obligations, which are mostly obligations amongst themselves.
This ‘notional crisis’ is already thawing, and soon markets will be back to normal.
I believe in simple examples which can make points very clear, so let’s embark on one.
Bank A lends $300,000/= to ‘Risky Borrower’ B on a house.
Then Bank A goes and buys protection for $300,000/= from Hedge Fund F by going long in a CDS.
Hedge Fund F then trades the CDS out to Investment Bank I. I trades it out to Bank C, and so on and so forth.
Many people get to know about this transaction and many new CDS contracts come into the market, referencing the same loan, and get traded around.
Soon what you have is a situation where the loan principal o/s is the same $300,000 whereas the notional principal o/s on CDS contracts related to the same loan is closer to around, say, $5 million.
Borrower B defaults, and the original Bank A recovers 20% less than the loan, so that Bank A’s loss is $60,000.
But because other institutions are short in CDS contracts on the same loan, the losses to them will be 20% of $ 5 million, which is $1 m.
They can’t honor this obligation because they never had capital adequacy to go short in the CDS to begin with.
In the melee, everyone starts mistrusting everyone else, among the FIs, and stops normal lending to one another to see how this situation gets sorted out. They also tighten their norms in lending to customers.
The amplification of ‘brick and mortar’ losses of only $60,000 through CDS o/s in this example throws the financial system into losses of $1,000,000.
But we have to remember that the $60,000 in brick and mortar losses is now sitting in the pockets of real world traders of goods and services;
whereas the $1,000,000 CDS loss is also an immediate CDS gain for another financial institution.
The total o/s CDS principal is more than $40 trillion. It’s difficult to estimate the loss to FIs from CDS settlements, but however large this is, it’s going to reflect immediately as a gain in another FI’s books.
Going forward:
OFHEO data shows that the monthly percentage decrease in home prices is already decreasing.
satish: “…because imf has only 200bn but the rescue requires atleast 300bn dollars for the rescue.”
since moldbug’s not here, thought i’d throw this out.
is the only way to fund the IMF at this point is through selling their a chunk of their gold reserves?
would china be a likely and/or willing buyer?
2fish — anyway to know the amount of new CDS contracts on various underlying instruments initiated in the last month?
if not, harbor a guess?
do you think there has been any CDS market in Agencies and/or Treasuries?
jkh,
I believe you are correct, but that is not how I think about it. The objective of my schemes is for the US government to accommodate foreign countries’ use of the dollar in the way that is most advantageous for the US, rather than to accumulate US reserves per se. In China’s case, their declared objective is also not to accumulate reserves, it is to maintain a currency peg. Both of my suggestions (tax or extra debt sales) work partly by directly reducing import demand and hence the trade deficit with China (and thereby reduce their reserves accumulation), and partly by spending the extra government revenue on convertible foreign currency (and subsequently on foreign assets) to give the US a trade surplus (or at least a smaller deficit) with those countries. If China’s real objective was to accumulate a certain amount of reserves or maintain a trade surplus of a certain value, they would presumably respond by targeting a weaker renminbi/dollar exchange rate, and the US in turn would need to buy more non-renminbi reserves to accommodate them.
Anyway, I hope you agree that both schemes would work (economically if not politically).
In passing, note that another option which I did not mention on this occasion is that the US could import more durable goods from overseas (eg German trains) rather than financial assets, in which case its current account deficit would not fall as much, but it would have more domestic assets to produce resources to service its debt held by foreign central banks.
I think the TARP is easier to understand, because in that case it is not necessary to consider different currencies and countries. Here I think the source of confusion is that, as TARP has been regarded as a bailout, it is assumed that the assets are practically worthless so that the headline figure will indeed end up as expenditure rather than investment.
I’m in FX sales at a top 5 fx bank, and I cover a number of institutional clients who are heavily involved in emerging markets. On the whole, the investment community has not sold a FRACTION of its holding of EM paper. That process is in its infancy.
To date, the carnage in EMFX is largely the result of the global liquidity squeeze, as the world’s ability to fund Dollar assets and service Dollar debts has gone to zero.
Note what happened in Brazil yesterday. USDBRL opened limit up on the local futures, trading around 2.52. The Brazilian central bank then announced the initiation of a $50bn (25% of their outstanding reserves) program of providing fx swaps to locals. The mechanism is a simple fx swa,p whereby the BCB will sell USD for spot settlement to locals, buying BRL, and simultaneously buy back those dollars for settlement at some future date. Nobody’s actual FX exposure has changed in this trade, but the locals have use of the Dollars for the term of the swap. USDBRL fell over 10% from the highs on the news, which to me is pretty good evidence these moves are not about FX exposure at all, but are instead rooted in teh global dearth of Dollar liquidity.
ttnk and Gregor Neumann
as far as emerging economies go, the bets (and earliest profits) are always on “potential”- what is already fully developed isn’t potential anymore, it’s part of profits reported which ultimately attract the later investors/bettors. Iguess the easiest way to see this is the very “industry” of venture capitalism - if it works out, it’s profitable. if it doesn’t work out, it’s a loss.
mind you, not saying that India doesn’t have problems; it has a huge array of problems, not least social, economic and political . Then again, so does China, to different extents of course. the question is can India emerge stronger from this crisis the way China had from 97/98. Will they take the opportunity to create a miracle?
2fish
nice invective against foreign loans and capital but does it ever work ? how much organic growth has there really been in China? The biggest question re: Korea is why? particularly after its horrendous experience in 97/98?
BTW, that korea and india comment and question in earlier posts werev made before the collapse yesterday, maybe that answered questions and vindicated answers - I’m still as dumb as ever unfortunately and not afraid to admit my dumbness!
It s hard for me to be surprised when everything is happening as it has in the past and as it should.
All this was expected, it may be happening a bit faster then expected, but hey … We ve been waiting so long for imbalances to be fixed for market to come back to reality … It s no surprise adjustment goes faster when it has been delayed for so long.
Brad,
There is a rumor that China is planning to devalue the Yuan by as much as 30% within days!
Source:
http://www.tickerforum.org/cgi-ticker/akcs-www?post=74052&findnew#new